Fly!

Bernie Schaeffer is no stanger to
out-of-favor picks. In fact, much of his strategy is based on contrary analysis.
Here, he looks at the fundamental and technical backdrop of the airline sector,
and despite its out-of-favor status, finds select opportunities in the
area.

"One sector I've discovered a few
opportunities in of late is the airline group. Yes, you heard me correctly. The
airline group, ferociously lambasted due to rising fuel costs, lowered fares,
and narrowly avoided bankruptcy proceedings, is a spot for potential
profitability. Why? In part, because of the ferocious lambasting. It will take
only the most minor nugget of good news (or the simple lack of horrendous news)
to surprise the skeptics. Wall Street is one of the primary offenders when it
comes to writing off the airline group as a lost cause. Of the 28 sectors that
we follow, airlines have the highest percentage of ‘sell’ ratings. Less than 40%
of the 91 analyst ratings on airline stocks are ‘buys.’ This is the lowest ‘buy’
percentage for the airline group since we began tracking this data in April
2003.

"While investors struggle to fly through
this turbulence, the AMEX Airline Index ($US:XAL.X ) has rallied more than 95% off
its March 2003 low (despite a rough start to 2005), and yet analysts are more
negative now than at any point during the past two years. And as US airlines
continue to post positive load factor and traffic numbers, some of these bears
may change their tune. Options players have also gathered on the bearish side with
regard to the airline sector. While some skittishness toward this sector is
certainly understandable, there should also be room for some positive thinking.

"Let's turn to one of my current favorites
in the airline group, Northwest Airlines (NWAC
NASDAQ). The stock enjoyed huge volume during the
first two weeks of January, on par with total monthly volume in previous
months. On the sentiment side, NWAC boasts a short-interest ratio of 12 times
the stock's average daily volume. What's more, nearly 32% of its available float
is sold on the short side. That's what I call ‘low expectations.’Meanwhile, I also own Delta Air
Lines (DAL
NYSE), which recently shook up
the airline sector when it announced sweeping fare cuts. The company continues to
fight back for market share after it narrowly avoided filing for bankruptcy protection in
the fall when its pilots agreed to cut their salaries by a third.
Sentiment remains bleak, with swarms of investors betting against the security.
Short interest for DAL sits at a hefty 50.4 million shares, or 39% of the
stock's total float. At almost eight times the stock's average daily trading
volume, the security could see some short-covering support. Further, options
players have loaded up on DAL puts."